The Conversation (0)
China has been heralded as the global economic savior who will push worldwide commodities markets higher and higher, but markets guru A. Gary Schilling recently warned that China is on the verge of a “hard landing” that could “prick the global commodity bubble,” sending oil and industrial metals markets like copper and yes, even silver, on a downward spiral.
By Melissa Pistilli—Exclusive to Silver Investing News
The Asian powerhouse’s appetite is so large that the People’s Bank of China has seen fit to raise interest rates yet a fourth time since October 2010 in order to cut back domestic consumption and reign in rising consumer prices. China is facing its strongest inflationary pressure in three years as consumer prices rose 5.5 percent in May. Even more telling, The China Securities Journal has opined that “curbing inflation should remain the top agenda for the government,” and government advisers are calling for further interest rate hikes. On Tuesday, Premier Wen acknowledged that controlling inflation is the top priority of the Chinese government.
Many silver bugs are understandably gushing about what rising inflation in China could mean for global gold and silver prices, as precious metals are historically viewed as a safe-haven during periods of high inflation. Even a recent article on Silver Investing News discusses the potential upside for silver prices if Chinese inflation problems should continue.
But, let’s not pull out the party hats and champagne glasses just yet. Are we forgetting that silver is not solely a precious metal, like gold, but at times even more beholden to the same fate as its industrial cousin, copper?
The reason I’m not ready to jump into the party is I’m an eternal pessimist, which always leaves me asking “But, what if . . . ?”
And my “what if” this time centers on a few recent articles by A. Gary Schilling warning that China is on the verge of a “hard landing” that could “prick the global commodity bubble,” and send oil and industrial metals markets like copper into a downward spiral.
As it turns out, China’s financial concerns aren’t limited to rising inflation. Moody’s Investor Services recently said that the “scale of problem loans at Chinese banks could be closer to the ‘bleaker’ range of estimates.” The firm put the number of Chinese bank loans that could eventually garner the label “non-performing” between 5 to 8 percent. Massive debt problems in local governments nationwide amount to $1.6 trillion, a figure China’s National Audit Office says can be paid back only by taking on more debt. And of course, there’s that real estate bubble threatening to pop.
Shilling, a seasoned economist, who was among the few who foresaw the U.S. housing market meltdown and eventual global financial crisis, isn’t buying the idea of ‘China as World Economic Panacea.’
“When someone expresses awe and admiration for China’s economic miracle, I’m reminded of Japan in the late 1980s. Back then, many Americans believed they’d soon be run out of business by Japanese firms or end up working for them,” writes Shilling. “Instead, Japan’s stock and real estate bubbles collapsed. Japan entered a deflationary depression that continues today.”
While his foreboding piece on China’s “hard landing” gave me pause, I was really struck by his more recent article on the very real threat the Asian nation’s economic woes pose to the global commodities markets.
“Talk about bubbles! If commodities haven’t been in one, I don’t know what a bubble looks like. And I’ve studied a lot of them over the years and concentrated on predicting their demises,” says a confident Shilling.
He sees evidence of the collapse in commodities markets already occurring, especially in copper, silver, crude oil, cotton and grains. Despite the warning signs, “commodity bulls . . . have maintained their long positions in copper, crude oil, corn, and even plunging silver,” he writes. “But markets anticipate, so it looks to me that the recent declines in commodities are foreshadowing a hard landing in China, with the effects spreading globally.”
Industrial demand for silver makes up about 46 percent of its total demand, making it highly susceptible to fluctuations in perceptions of global economic growth. “While this helped silver in 2009 and 2010, the recent weakness of global growth indicators has worked against silver in 2011,” says a recent Precious Metals Weekly report from ETF Securities.
A look at silver’s price movements over the past few months does show that the sometimes precious, sometimes industrial metal is behaving more like a classic physical commodity market in its reactions to outside market pressures. Commodities markets in general have been quite volatile after surging early on in the second quarter of this year as the outlook for a global economic recovery turns cloudy. There are fears economic growth is slowing in the US, Europe and even Asia.
On Monday, those fears and a rising US dollar led to selling in the commodity markets, including copper and silver. Early in the trading session Tuesday, the price of silver continued to trade like a physical commodity market, dropping over a dollar below its NY Monday closing price of $35.75 an ounce.
However, the bulls were given some much needed relief later in the day following the release of minutes from the Federal Reserve’s June 21 monetary policy meeting. The price of silver on the COMEX hit a six-week high and closed up nearly 6 percent to $38.33 an ounce Wednesday on fresh headlines Europe’s financial crisis and speculation that the Fed may embark on a third round of QE measures (don’t hold your breath, say some analysts).
Yet, copper prices didn’t fair as well, leaving some doubt as to whether silver may follow in gold’s path or once again be pulled down by projected weak industrial demand. The need for QE3 would also mean the US economy is failing, putting further pressure on commodities markets.
Not Everyone is so Pessimistic
Despite the kill-joy prophecies of sage oracles like A. Gary Shilling, there are those with just as much market experience who remain overwhelmingly optimistic and find such warnings as Shilling’s ludicrous.
“China’s the next greatest country in the world. If you sold America in 1911 you might have looked good for a year or two, but you’d look pretty foolish over the next seven to eight years. Why should I sell? I don’t follow other people,” balks famed investment guru Jim Rogers. “Every country, every family, every individual has setbacks as they rise. China is going to have some horrible setbacks. America had unbelievable setbacks as we rose.”
To be fair to Shilling, he isn’t entirely long-term bearish on China, concluding his discussion of the Asian nation’s potential collapse he said, “None of this suggests that the long-run growth story for China is wrong. It’s just that its stop-go economic policy will keep the ride volatile, and that current enthusiasm for the Middle Kingdom is way overdone.”
A Reuters report out Wednesday showed that the Asian giant’s economy grew by 9.5 percent in the second quarter, slightly above a recent Reuters poll forecast of 9.4 percent. “We had this batch of better-than-expected Chinese data, even though the Chinese economy is slowing which is of course weighing on base metals demand, it was not as much as feared,” commented Danske Bank analyst Christin Tuxen.
And it’s not all doom and gloom for silver. TD Securities expects silver to top $40 an ounce in the second half of 2011. The financial firm recently forecast an improving global economic outlook, especially in the U.S. and Japan, for Q2 2011, which could lead to increased demand for industrial metals like silver. The price of silver may reach $40 an ounce and beyond by the end of this month if the fight in Washington over the US debt ceiling continues.
All this uncertainty and clash of opinions is what makes the silver market so volatile in nature, giving it the status as one of the riskiest investment classes. What other commodity has as much hostility between the bulls and the bears? The silver market is not for the faint of heart.